Residential and commercial real estate has experienced some of the most drastic and significant changes over the past few years. Changes to the way we work as a society have shaped and altered both industries. Remote work has set in motion major migration out of cities and into the suburbs. This movement has had a significant impact on the commercial side from both an office and retail perspective. Conversely, residential real estate has seen a boom. High demand and low supply have sent home prices soaring. Pairing rising costs with historically high interest rates has forced many to reconsider their housing decisions. These changes have caused many in the industry to think creatively when addressing decisions when it comes to the commercial and residential real estate space.
The U.S. Census Bureau’s 2022 American Community survey found that remote work has tripled from 2019 to 2022 (5.7 to 15.2%). This change has created a significant increase in direct office vacancy rate, which observed a 7.3% increase in downtown offices and a 3.9% increase in suburban offices from 2019 to 2023 per Nelson Economics analysis of Colliers International Data.
These shifts have contributed to increased demand in the residential real estate market in suburban areas, as workers are moving out of the city and into the suburbs. Several major cities saw increased migration out into their surrounding suburbs, one of which was Miami. According to a PWC study, Tampa experienced a total of 3,324 new households over the past 12 months mainly from New York and Miami. With so much migration into Tampa many were out-migrating to the neighboring Lakeland area for more affordable housing.
As individuals are moving out of the city and into the suburbs, the residential real estate market has boomed. Median home prices have increased 51% since December 2019, and interest rates are the highest they have been since 2007. This has created an opportunity in multi-family housing. Based on the same PWC study conducted above, 1.2 million apartments have been added since the pandemic to address the housing shortage with another million projected to be completed by 2025.
Migration, remote work, and the popularity of ecommerce have also taken a toll on the brick-and-mortar retail industry. According to Mckinsey, foot traffic near stores in the metropolitan areas is still down 10-20% compared to pre-pandemic traffic. The decreased foot traffic has caught the attention of many in the research community; some of which are predicting a drastic decline in total U.S. malls. During 2022, the U.S. had 700 malls. Some analysts are predicting that number could drop to 150 malls over the next 10 years. Business Insider reports 947.5 million square feet of strip mall space across America. According to a report issued by the enterprise community partners, if just 10% of vacant strip malls best suited for redevelopment were turned into housing, it could create more than 700,000 homes.
The shortages in the residential real estate space have created an opportunity for developers, homebuilders, architects, and real estate investment firms alike to reprioritize commercial properties. These opportunities do come without their fair share of challenges. Rezoning, construction costs, and physical limitations of each building are a few of the major hurdles to cross when considering the change from commercial to residential. The federal government has attempted to ease some of the concerns by offering funding to those willing to redesign these commercial properties into residential livable spaces. Cities such as Boston, New York, and Washington D.C. have offered tax abatement, rezoning initiatives, and decreased regulations around the projects to expedite the process.
In summary, the drastic changes have forced many to reconsider their plans in both the commercial and residential real estate space. As demand for residential real estate remains high, many will be looking for alternative solutions to meet demand. On the flip side, the same creativity applies as brick-and-mortar retail demand falls and office occupancy remains low. Flexibility and creativity will be crucial to the industry’s success going forward.